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Comment by mjfl | Hacker News Reader

As someone who has worked in the industry: hedge funds are certainly parasites on our society, who make money not from wealthy clients (as is widely thought) but by managing government money through the social security system, union pension funds, college endowments, and sovereign wealth funds. They are a tool to redistribute billions of dollars of ordinary people's money into the pockets of an 'in-group' that then uses the money to buy political influence. I've watched this happen with my own eyes.

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Hedge funds don’t magically take your money any more than Santa Claus takes your money.

Pretty much none of your claims are true, unless those actors desire to be in a hedge fund (same as any place to invest). For example, social security is prevented by law from investing in anything except specially crafted Treasury bonds. Sovereign wealth funds are not “ordinary people’s money.” Union pensions are controlled by unions, and if they’re wise, are spread over many options. Same for college endowments.

It’s not hard to look up the sizes of these various asset categories and see your claims are mathematically impossible. I believe arithmetic over your eyes.

Don’t want one, invest elsewhere.

I was wrong about the social security system, which I must have gotten confused with some kind of pension system, like CALPERs, which used to invest in hedge funds before pulling out in 2014, but still allocates 40% of its portfolio into private equity [1], which may be worse than hedge funds for reasons I have discussed elsewhere. Everything else I said was true.

> Don’t want one, invest elsewhere.

Ordinary people have little control over what their pension funds invest in, and typically are not informed on these issues.

[1] https://raoglobal.org/insights/calpers-goes-big-on-private-e...

> which may be worse than hedge funds

PE obtains higher returns than public funds simply because they have more options to invest in. They can put the cash into anything public invested funds can choose, AND a massive range of other projects.

CalPERS is not an ignorant investor. They see the results, and they allocate accordingly.

From your own link : "Over the past ten years, private equity has delivered an annualized return of 11.8%, compared to 8.9% for public equities, 2.4% for fixed income, and 7.7% for real assets. With traditional asset classes like bonds struggling to keep pace with inflation, CalPERS is looking to private equity to help them meet their long-term investment goals."

So yes, if you want worse returns, continue to believe unsupportable things. If you want to manage people's money, then choose well, and this is chosen well.

>Ordinary people have little control over what their pension funds invest in, and typically are not informed on these issues.

Which is good, because they also are not generally capable to manage their investments with as good as returns (otherwise every little mom and pop would beat PE, which is extremely far from the truth).

A google scholar search on PE returns versus public, top several hits that give numbers to the question:

https://www.joim.com/wp-content/uploads/emember/downloads/P0... - PE outperforms

https://openurl.ebsco.com/EPDB%3Agcd%3A7%3A13677223/detailv2... "The model illuminates why, over the short term, private returns are superior to public ones, whereas over the long term, public and private returns are largely interchangeable after proper adjustments are made, resolving a long-standing conundrum"

https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12154

"We study the performance of nearly 1,400 U.S. buyout and venture capital funds using a new data set from Burgiss. We find better buyout fund performance than previously documented—performance has consistently exceeded that of public markets. Outperformance versus the S&P 500 averages 20% to 27% over a fund's life and more than 3% annually. "

It's best not to invest with emotion, but with knowledge. Knowledge comes from analyzing markets and reading financial industry research, not repeating misinformed tropes.

I would argue the CalPERs does not know the return of its private equity investments because private equity is a recent phenomenon and one that locks up funds for 4-7 years, and I would predict that its realized returns will be disappointing. The financial literature is a crapshoot filled with selection bias that I wouldn't consult for anything. Rather, I will rely on my personal experience which is: private equity is a racket.

I don’t understand why so many people in this thread keep posting trivially easy to check incorrect claims.

Private equity, in the modern form, has been used since before 1950. It’s trivial to check.

CalPERs provides detailed annual reports with returns broken out. No one runs a nearly half trillion fund and “does not know the return of its” component investments.

I’m glad you trust your limited, obviously emotionally driven, demonstrably lacking in knowledge at every comment in this thread, beliefs over market data. You demonstrate to others why so many people are not going to do well handling their own pensions compared to those using proper methods.

You misunderstood the meaning of what I said. Private equity has existed for a long time, but as an asset class has it had a huge boom for the past 20 years, gaining market share that it never had. This trend has been recognized by several media outlets. This article in Moonfare shows the private equity AUM has roughly tripled in the past 15 years and the number of private equity funds quadrupled between 2012 and 2021 [1]. This article by Citizens Bank documents the exponential rise in the number of companies owned by private equity while public has remained flat [2]. Another article discussing the exponential growth can be found here [3].

I guess I wasn't super clear, but anyone who's worked in the actual industry would have understood what I meant. And the fact that you didn't suggests to me that you don't have a lot of practical experience, or if you do you are stunningly aloof to the workplace discussions of your colleagues.

People who actually work in the industry would also be familiar with the fact that, yes in fact people who run funds with a half trillion under management can be stunningly unsophisticated and simply go with flashy new trends - like private equity! This has been commented on in several industry podcasts.

And again, your reference to academic studies in the financial field which, despite some people like AQR using them in their marketing, most practitioners seriously discount due to the severe problem of selection and survivorship bias, makes me believe you actually don't have any idea what you are talking about.

Actually you've said a lot of absurd things:

> Hedge funds don’t magically take your money any more than Santa Claus takes your money.

Again, people don't generally control what their pension fund invests in.

[1] https://www.moonfare.com/pe-masterclass/private-equity-marke...

[2] https://www.citizensbank.com/corporate-finance/insights/priv...

[3] https://www.dakota.com/resources/blog/private-markets-on-the...

You completely miss the reason it's grown, and complain through repeated ignorance.

It's grown because it has proven itself, tends to outperform public equity, and provides asset diversification.

It would be dumb for any asset manager to ignore the evidence. I'd certainly fire any asset manager that trades on voodoo while ignoring such signal.

As to working in the industry, you should check my comment history. I've done modeling and fundamental algorithms for a huge range of industries, including new pricing algorithms I developed for investment houses. I have a PhD in math, degrees and grad work on CS and physics, taught graduate mathematical econ at a top 50 univ, and have done significant work and consulting for finance places. So I sorta do know about this.

As to your implication that you do work in this industry, you clearly don't. Just checking your comment history though shows you doing this level of uninformed commenting on topics and people correcting you just like here, going back a far as I checked.

So no, you have no idea about the industry any deeper than someone who read a blog post.

> This has been commented on in several industry podcasts.

OMG! Commented on in podcasts? Now I believe. For complaining that others can be unsophisticated, you cite this drivel as evidence, against the peer reviewed, track record researchers I posted above?

It figures. Keep cherry picking siloed low information sources to bolster your beliefs. I'll take widely sourced, properly done analysis.

Go ahead and post more. This has more than run it's course

> managing government money through the social security system

Do you mean the social safety net? Social security does not invest in hedge funds.

Well, not yet.

You are right about Social Security. It only holds Treasuries. But, there are many other pension funds like teachers pension, government workers pensions, etc that manage working class money.

I’ve been satisfied with the hedge fund I was in

They didn't just do common stock equity trades, they sliced and diced money flows into and out of companies so interestingly

It felt like I had employed people to find, and create, deal flow

In bear markets theyd find companies that VCs all passed over, and created a pivot for them and extremely favorable capital terms to the hedge fund such as revenue splits before it hits the company’s books

When people say parasites, I see transactions that would never have happened

I see transactions I would never be able to get into the room to negotiate to happens

I also see how nobody knows anything. People see hedge fund movements in equity positions, but they wont see revenue splits, inventory splits for the fund to sell themselves

Its all about what you/your fund specifically does

Why are you singling out hedge funds? The blame lies equally with all active fund management, as well as the investment managers (e.g. pension funds) who decide to allocate to them instead of to a passive tracker.

> blame lies equally with all active fund management, as well as the investment managers (e.g. pension funds) who decide to allocate to them instead of to a passive tracker

Except active management works for any metric other than long-term yield maximisation. (Most institutions have short-term needs, whether for liquidity or optics.)

As someone else in the industry, is it fair to categorize all HFs this way?

funds with high 'skin in the game' as in high amounts of manager net worth in the fund, tend to be an exception to what I'm saying.

Wait, which part of the social security system is investing in hedge funds?

US Social Security doesn't. Other countries may like Norway: https://en.wikipedia.org/wiki/Government_Pension_Fund_of_Nor...

Any advice to reform things? As individuals or as a collective?

(1) widespread education and awareness of this phenomenon, (2) put in restrictions on large institutions i.e. the government, unions, universities so that they only invest in funds with 'low-fee' structures and hire professional risk management at the institution-level that hedge risks using more standard methods like mixing bonds and equities and cash. Ban large institutions from investing in private equity, which is a high fee structure built to hide losses over long term periods.

I have invested in hedge funds as an individual. Your proposals would be great for me; less competition. I’m sceptical of the public benefits, though there is absolutely a political bloc who will like the optics of banning public investments in HFs and PE.

> private equity, which is a high fee structure built to hide losses over long term periods

Empirically false.

The problem with PE is the same as HFs: fees and dispersion of outcomes.

by all means, keep letting those charlatans take your money.

Are you denying that private equity avoids reporting standards that are mandated for public companies?

> private equity avoids reporting standards that are mandated for public companies?

So do startups and small businesses. I’ve made money in both (as well as hedge funds).

Good investments aren’t measured by consultant spam. I’d be furious if my managers burned my money on e.g. commissioning boiler plate risk factors.

private equities and startups/small businesses are fundamentally different in terms of the 'skin in the game' that startup founders and small business owners have in their business. They've typically invested themselves significant parts of their lives into their businesses. The same cannot be said of private equity funds, and you should know better.

> terms of the 'skin in the game' that startup founders

I’ve done a startup. My skin in the game was significant, but I was less dependent on the outcome of the startup than I was keeping my job earlier in my career.

In any case, fraudsters also have lots of skin in the game. This argument is irrelevant to the irrelevance of public reporting requirements, or the empirical track record of private equity for LPs.

How about mind your own business?

The main problem to me is everyone wants to tell everyone else what to do "for the good of society" but over my lifetime this has been a slow acting cultural poison.

Less than 20 years ago it cost me $7 a trade for one side and that was the cheap revolutionary price for the retail investor. Today it cost me ZERO. That is because of hedge funds. I doubt this will last forever because someone will come along and "fix" what is not broken "for the good of society".

Yeah places like PIMCO are basically stealing from pension funds through a bunch of complicated financial engineering. Some of the assets they trade arent liquid, theres no consensus on fair price. And so a bunch of funny business goes on

> by managing government money through the social security system, union pension funds, college endowments, and sovereign wealth funds

Why don't you target that anger and contempt to the organizations willfully giving money to these organizations?

"Social security system is a parasite on society, who steals taxpayers money and throws it away in inefficient vehicles evidence over decades that tells us that their investments aren't outperfoming index funds"

> Why don't you target that anger and contempt to the organizations willfully giving money to these organizations?

This happens from time to time. Most recently, in pensions withdrawing from private equity. It’s historically come to bite when these managers hit a bout of volatility. Put simply, portfolio theory is incredibly robust.

The question isn’t why hedge funds, but why does it keep paying so well?

Why can hedge funds negotiate such high fees despite lackluster performance?

You answered it in the prior sentence: portfolio theory is incredibly robust. They (claim) to provide diversified return. The idea is that although they may not provide a net return comparable to low cost equity ETFs, they provide diversified return. And portfolio theory tells us lower yielding assets can actually increase your portfolio's risk-adjusted return, as long as it's not perfectly correlated with your existing investments.

Whether this plays out in practice is a different story, but that's the idea and selling point.

> Why can hedge funds negotiate such high fees despite lackluster performance?

As you point out, what counts as performance varies. Magnitude of net returns is important. But by analogy, you could get massive net returns betting on the Powerball.

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